How to use equity to purchase another property

Question

I have purchased my first home, which I plan to live in for my first year and then rent out, but I’d like to start looking for my next rental to purchase. I’m just having trouble understanding just how to use my equity in this home to purchase my next home. Some of the questions I find myself asking are: Are there requirements on how much equity you must have to use it or can I use any equity I have as collateral? Also, what would be my first steps in trying to use my equity? I’ve been trying to understand the whole process more, but I just can’t seem to find a definite answer.

Account Closed · Answer

Hi @Trey Rittenhouse it'll be difficult to capture the equity in your home if you just bought it unless it has already appreciated a lot. Most lenders will let you do a cashout refi or HELOC for up to 70-75% of the property's value. As an example, if you bought it for $200,000 and put 20% down, the current mortgage will be $160,000. If the property appreciated to $250,000 and you did a cashout refi for 70% LTV, your new loan would be $175,000, giving you a $15,000 difference that you can use for your next investment.

Hopefully, this helps!

Evan Polaski · Answer

@Trey Rittenhouse, as Sean mentions, in reality you have to keep at least 20% of your equity in the property, and depending on lender it might be up to 30%.

When you want to get outside of the box, i.e. cross collateralizing properties, you can do this, but your terms will be more stringent and likely borrowing at higher rates.  And even when you find a bank that will cross collateralize assets (meaning multiple properties are securing the same mortgage, so if you default on the mortgage, you lose both properties) they will still likely limit your LTV to 70-80% of total value, which means you really aren't "tapping into your equity" from your first property.

But I encourage you to call around to some local banks and credit unions.  There are typically some that are more favorable on investment properties and might have higher loan limits.  But those will likely cost you more in fees and interest.